Causes of globalisation and FDI

Five drivers of globalisation

1. Trade liberalisation: tariffs and quotas cut through rounds of negotiation under the GATT and, since 1995, the WTO.

2. More and larger trading blocs: free trade areas, customs unions and common markets remove barriers between members.

3. Political change: the breakdown of the Soviet Union opened former planned economies to trade and investment, and China's opening up from the late 1970s brought a huge, low-cost labour force into the world economy.

4. Lower transport and communication costs: containerisation, larger ships, cheaper air freight, the internet and mobile phones make it cheaper to trade and to manage operations far away.

5. The growing influence of TNCs: TNCs spread production, technology and brands across borders and lobby for open markets.

Why TNCs undertake FDI

• Market seeking: produce close to customers, avoid tariffs (build inside a trading bloc) and cut transport costs.
• Cost (efficiency) seeking: cheaper labour, land or energy; lower taxes; fewer regulations.
• Resource seeking: access to raw materials such as oil or minerals.
• Strategic asset seeking: buying brands, technology or skilled teams.
• Economies of scale from spreading fixed costs (research, marketing) over a bigger global market.

Impact of FDI on recipient countries

Possible benefits: jobs and incomes; a rise in AD (investment) and long-run AS (capital stock); technology and management skills transferred (spillovers to local suppliers); tax revenue; exports and foreign currency, improving the current account.

Possible costs: profits repatriated (an outflow in the primary income account); jobs may be low-skilled; local firms crowded out; environmental damage; transfer pricing reduces tax paid; footloose TNCs may leave; TNCs can gain political influence.

Evaluation: the impact depends on the type of FDI (greenfield factory or takeover), linkages with local firms, the skills of the workforce, the tax deal offered and the quality of regulation.

Worked example

Explain one reason a car maker might build a factory inside a customs union rather than export to it.

1. Goods imported from outside a customs union face the common external tariff.
2. Producing inside the union avoids the tariff, so cars can be sold at a lower price.
3. This is market-seeking FDI.

Answer: To avoid the common external tariff and get tariff-free access to the whole union market.

Check yourself

1. Which change most directly reduced the cost of shipping manufactured goods long distances?
   • Containerisation
   • The growth of portfolio investment
   • Higher oil prices
   • Stricter immigration rules
   Show answer

   Containerisation. Standard containers cut handling time and costs at ports.

2. A clothing firm moves production to a country with lower wages. This is
   • market-seeking FDI
   • resource-seeking FDI
   • cost-seeking FDI
   • portfolio investment
   Show answer

   cost-seeking FDI. The motive is lower production costs.

3. Explain how repatriated profits from FDI can worsen the recipient country's current account.
   Show answer

   Profits sent back to the TNC's home country are an outflow of primary income, which is part of the current account, so the current account balance worsens.. Investment income paid abroad is a debit in the primary income section.

4. Which political change does the specification identify as a cause of globalisation?
   • The creation of the euro coin designs
   • The introduction of national minimum wages
   • Higher income tax in developed countries
   • China opening up to trade and investment
   Show answer

   China opening up to trade and investment. China's opening brought a large labour force and market into the world economy.

5. Explain how FDI can raise productivity in local firms of the recipient country.
   Show answer

   Local suppliers and workers learn technology and management methods from the TNC (spillovers), and staff who move to local firms take skills with them, raising productivity.. Technology transfer and skills spillovers are a main benefit of FDI.

6. Which factor would most increase the benefit of FDI to a recipient country?
   • The TNC imports all its components
   • Generous tax holidays lasting 20 years
   • The TNC employs only expatriate managers
   • Strong links between the TNC and local suppliers
   Show answer

   Strong links between the TNC and local suppliers. Local linkages spread spending, jobs and technology into the domestic economy.

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Sources

• Pearson Edexcel International Advanced Level in Economics specification (issue 2)

Last updated 8 November 2026. Spotted a mistake? Tell us.